PRC Legal Update: Termination of Employment in China and Issues to Consider During the Covid-19 Pandemic | Bryan Cave Leighton Paisner

The termination of the employment relationship by the employer in China is practically never easy, even without a crisis situation. When it comes to the economic downturn, terminating employees becomes much more sensitive. Three years of unprecedented developments in China stemming from the COVID-19 pandemic have presented major challenges for multinational companies with local offices in China, including the need to properly manage labor relationships with local employees. In this article, we lay out the basics of termination of employment under PRC law, including reasons and procedures for termination of employment, calculation of severance pay, and some practical issues related to terminating employees during the pandemic.

Reasons and procedures for termination of employment by the employer

Under the Labor Contract Law of the PRC, an employer may only dismiss an employee under the circumstances specified by law, and where a union has been established within the employer’s organization, that union must be notified in advance of any unilateral termination of employment by the employer. The following are the main circumstances in which an employer may lawfully terminate an employee’s employment.

Employer and employee can terminate the employment contract by mutual agreement.

  • Termination with 30 days’ notice or payment of one month’s salary in lieu of termination

An employer may terminate an employee with 30 days’ notice or one month’s salary in lieu of such notice if (“Article 40 Circumstances” of the Labor Contract Law of the PRC):

  1. the objective circumstances have changed so significantly that the original employment contract cannot be fulfilled and no agreement can be reached between the employer and the employee on changing the employment contract;
  2. the employee is unable to return to his or her original job or another job arranged by the employer after the specified period of medical treatment due to illness or injury sustained during his absence; and
  3. the employee is unfit for the job and remains unfit after training or reassignment to another job.
  • Termination due to employee’s fault

The Employment Contracts Act allows an employer to terminate an employee without notice or payment in lieu of termination if the employee:

  1. fails to meet the hiring conditions during the probationary period;
  2. seriously violates the internal rules and policies of the employer;
  3. is corrupt or negligent in the performance of his duties and causes serious harm to the interests of the employer;
  4. fraudulently enticed the employer to hire him or her by means such as fraud, deception or coercion;
  5. is simultaneously employed by another employer, which significantly impairs the performance of his duties, or he refuses to remedy the situation after receiving the employer’s request; or
  6. is convicted of a crime.

If, due to bankruptcy restructuring, operational difficulties, transfer of property or change in the way of business, etc., termination of employment contracts involving more than 20 employees or more than 10% of the total number of employees (whichever is the lower), the employer must give at least 30 days prior to such termination, inform the union or any employee of the Company of the termination plan and, after obtaining the union or all employees’ opinion, report the proposed termination to the local labor authorities.

  • Dismissal due to voluntary termination of an employer

If an employer decides to disband before the end of its operating period, the employment contracts with its employees will be terminated. In such circumstances, the employer must complete the legal procedure for voluntary liquidation and notify employees of the liquidation decision in advance. Since the liquidation process can take a long time (up to a few months), in practice the employer will usually negotiate with the employees and terminate the employment contracts with their employees in advance, either by mutual agreement or with 30 days’ notice. Termination or payment of one month’s salary in lieu of termination.

Calculation of severance pay

Under the Labor Contract Law of the PRC, in most cases the employer is required to pay severance pay when proposing or initiating the termination of the labor contract, including the situations described in the section above.

The severance payment is based on the monthly salary of the employee and the total number of years of service with the employer. A period of between six and twelve months is counted as one year of service, and a period of less than six months is counted as half a year of service.

The economic compensation to be paid by the employer to each employee is equal to the average monthly salary of the employee in the last 12 months before the termination of the employment contract, multiplied by the number of years of service of this employee.

However, if the average monthly salary of the employee is more than three times the average monthly salary of the employees of the region where the employer for the past year as announced by the local government, the basic monthly salary is used for the calculation of the severance pay of this employee is three times the average monthly salary for employees in the region, and the number of years counted for severance pay is also capped at 12 years. [1]

Questions about annual leave not taken

Under the PRC Employees’ Annual Paid Leave Regulations and Measures, an employee who has worked for an employer for at least 12 consecutive months is entitled to annual leave with pay (“statutory annual leave”). In general, an employer is obliged to compensate for unused statutory annual leave in the event of termination of employment.

The number of days of statutory annual leave is determined based on the employee’s cumulative length of service with the employer. An employee’s statutory annual leave days shall be (i) 5 days if his/her accumulated years of service is more than 1 year but less than 10 years, (ii) 10 days if accumulated years of service are more than 10 years but less than 20 years, and (iii) 15 days in the case of at least 20 years.

However, in the event that any of the following circumstances apply to an employee, he/she is not entitled to statutory annual leave: (i) an employee is legally entitled to summer and/or winter vacation longer than his/her annual vacation, (ii) an employee takes at least 20 days of leave for personal matters and salary is not deducted in accordance with the employer’s company policy, or (iii) an employee whose cumulative years of service is 1-10 years is at least two months’ sick leave, or 10-20 years is at least three months sick leave, or over 20 years is at least four months sick leave.

If an employer terminates the employment contract with an employee, the employer should compensate the employee for any unused statutory annual leave days equal to 300% of the employee’s daily salary income, where:

  • the daily salary = monthly salary / 21.75
  • the number of statutory annual vacation days not taken = (the number of calendar days in the company in the current year / 365 days) × the number of statutory annual vacation days that the employee should enjoy in the whole year – the number of statutory annual vacation days in the current year being used became

The above compensation of 300% does not apply to contractually agreed paid annual leave in excess of the statutory annual leave days. If the remuneration for the paid annual vacation days specified in the employment contract or in the employer’s company regulations is higher than the statutory norm, the contract or company regulations shall apply.

Termination of employment in light of Covid-19

Since 2020, several public policies and regulations regarding employment issues during the Covid-19 pandemic have been announced by the PRC government. The Supreme Court of the PRC and some local high courts have also issued judicial interpretations to provide guidance on employment issues and disputes arising from the current pandemic situation.

These newly released regulations, guidelines and judicial interpretations demonstrate that PRC regulators are more willing to encourage cost-effective measures to be taken by employers than simply enacting layoffs when employers are in financial crisis.

The government of the PRC has specifically stated that an employer shall terminate the employment contract with a worker who is a Covid-19 patient, a suspected patient and a close contract and is undergoing isolation treatment or medical observation and a worker who is not in able to work normally may unilaterally resign due to quarantine or other emergency measures imposed by the government based on certain termination grounds such as Article 40 Circumstances and Article 41 Circumstances of the Labor Contract Law of the PRC. For those workers in the above cases whose employment contracts expire during the Covid-19 Prevention and Control Period, the expiry date of these employment contracts must be extended until the end of the worker’s medical treatment, medical observation or isolation, or until emergency measures are lifted.

For other employees who are not categorized as employees with Covid termination restrictions under these regulations, the termination procedures remain the same as those set forth in the PRC Labor Contract Law as explained in the sections above.

Conclusion

Multinational companies with operations in the PRC must exercise caution when terminating employees during the pandemic, especially when considering mass layoffs. To mitigate negative business impact resulting from inappropriate termination of employment, employers must remain aware of the latest government regulations and guidance in this regard, and proactively and carefully assess the complexities and potential legal risks before proceeding staff reduction strategy. Legal procedures must be followed at all times to avoid possible labor disputes and severance pay.

[1] These rules apply to the calculation of the severance pay of an employee whose tenure with the employer began after the entry into force of the Labor Contract Law of the PRC on January 1, 2008. For employees whose period of service began before this date, the severance payment for the period before January 1, 2008 is calculated according to the slightly different regulations then in force.

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